## Is risk reward ratio important to forex trading?

Most forex traders impose some kind of risk reward ratio on the trade setups they enter. Demanding a good risk reward ratio helps filter out setups that have poor proposition. Asking for a really good ratio can even help traders tide through bad trading patches. Mathematically, strong rewards can even offset poor winning rates. Traders I spoke to instinctively agree that risk reward ratio for trading must be at least even i.e. 50:50 pips. High risk to low reward is not sustainable they say. But is a low risk high reward ratio of say 50:100 pips really necessary? Some traders do not think so. After all, an individual with a mature winning strategy must have very high proportion of winning trades. When on possesses such a strategy, he does not need to be demanding with risk reward ratio.

Is this true? I prepared 3 tables. Parameters are risk reward ratio and win rate expressed as ‘number of wins in 10 trades’. We look at the outcome.

## Profitability changes with risk reward ratio, win rate

#### Table 1 – Low risk high reward ratio of 50:100 pips

Number of wins in 10 trades12345678910
##### 1000

Trader adopting this risk reward ratio turns profitable when he achieves somewhere between 3 to 4 wins out of 10 trades i.e. 30 – 40%. Traders with high win rates also have higher profitability than in Tables 2 and 3.

More forgiving for individuals who have not achieved high win rates but also more rewarding for accomplished ones.

#### Table 2 – ‘Medium’ risk reward ratio of 50:75 pips

Number of wins in 10 trades12345678910
##### 750

This is the ‘in-between’ profile. Trader turns profitable as long as he does better than 4 wins in 10 trades. But the loss to profit turning point is 4 in 10.

### Table 3 – Even risk reward ratio of 50:50 pips

Number of wins in 10 trades12345678910
##### 500
Trader asks for even risk reward ratio. The motivation behind is this choice is the belief that there must be more 1:1 setups that 1:2. By sacrificing reward, profitability has to come from higher win rate, doing more trades. Trader has to do better than 5 winning trades out of 10. For traders who can achieve 10 wins out of 10, total profitability is lower instead.

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

## 9 thoughts on“How many winning trades to profit with these forex risk reward ratio”

1. Jayrome Lai says:

Thank you MM for this piece of analytical piece of helpful content. As they say, there is no right or wrong here and you have presented it nicely with reasons for each risk reward threshold.

1. Soh Tiong Hum says:

Hi Jayrome, there you go again. There is only one MM in Singapore and his Surname is Lee. FYI showing the outcome of different risk reward ratios is easy but answering whether there are more 1:1 or 1:2 setups is harder.

1. Daniel Ku Guet Liang says:

Profound but super “Like”. How to tell if you hit 1:1 or 1:2 is a big challenge. any tips? =)

1. Soh Tiong Hum says:

+ 1 for the ‘super Like’. Unfortunately, I can’t tell you much about 1:1 or 1:2 or in fact 1:∞ because it depends on the setup. The more significant and obvious a pattern, the further price will move when the pattern is complete. That is all I can say. Any more than that I have to reach God mode first. LOL.

2. Kai says:

This is a clear table list out that’s saves me time from doing my own algorithm.

3. Jeanette Wong says:

Thanks Tiong Hum. Useful table. In your experience, does a trader progress from even risk reward ratio gradually to low risk high reward ratio? The latter needs a certain amount of conviction which comes with more trading experience.

1. Soh Tiong Hum says:

Hi Jean, there is no particular progression. In my opinion, the risk reward ratio depends much on personal trading plan. As for conviction, it has to be cultivated. An important step is to start on the right path. Sticking to rules will help to bring early success which reinforces confidence, then conviction. Another way is to find good solid buddies who are already successful to trade together. Let them infect you with their conviction.

1. Jeanette Wong says:

Thanks Tiong Hum!

4. Tan Yu Hong says:

Conviction is indeed infectious.

Can someone pls spread this godly virus to me?